Opinion
Civil No. 00-182-HA
September 13, 2001
ORDER
Presently before the court are plaintiff's Motion Number One (#60) for Partial Summary Judgment and plaintiff's alternative Motion Number Two (#65) for Partial Summary Judgment. The resolution of these motions turns on the interpretation of a noncompetition clause in an employment contract. Plaintiff is seeking to recover severance compensation which the defendant has withheld based on its reading of the noncompetition clause.
BACKGROUND
In 1991, plaintiff signed an employment agreement (the 1991 agreement) with Fred Meyer, Inc., by which he became the Chief Executive Officer and Chairman of the Board in return for a beginning salary of $500,000 per year and other significant benefits. The 1991 agreement contained the following severance clause:
In the event Employee is terminated by the Company for any reason other than for "cause," death or permanent disability, employee shall be entitled to payment of the greater of the following amounts: (a) the amount of Employees [sic] last determined monthly salary through the third anniversary of the date Employee commences employment with the Company or (b) one year of compensation at Employee's last determined salary (payable in either case on the Company's normal payroll dates and without interest).
(Document #69, Declaration of Jeffrey Gordon, exhibit 1, page 5). The 1991 agreement did not contain a noncompetition clause.
Plaintiff and Fred Meyer amended plaintiff's employment agreement twice between 1991 and 1998. Those amendments were apparently relatively minor, and neither party claims that those amendments are material to this case.
Fred Meyer prospered during Miller's tenure as CEO. It acquired Smith's Food Drug Centers, Ralph's Grocery Company and Food 4 Less Holdings, and Quality Food Centers. With these acquisitions, Fred Meyer became a 15 billion dollar company with stores throughout the west coast and in several other states throughout the western United States.
In 1998, Fred Meyer and The Kroger Company (Kroger) began negotiations which resulted in a merger agreement. At that time, Kroger was a 30 billion dollar company with stores everywhere in the country except the western United States. The merger agreement and plan was entered into on October 18, 1998, but was subject to stockholder ratification and federal regulatory agency approval.
On October 13, 1998, in anticipation of the planned merger, plaintiff and Fred Meyer amended Miller's employment agreement a third time (the 1998 agreement). The 1998 agreement did not alter Miller's duties or responsibilities, but it did double his base annual salary and revise some of the bonus provisions contained in the earlier contract.
The most striking change to the employment agreement appeared in the severance provision. Where the pre-1998 severance clause was contained in two paragraphs covering a half page, the 1998 severance clause stretched to seven paragraphs covering more than seven pages. The new clause contained the term "Qualifying Termination," which was defined to include "Termination within 18 months after a Change in Control if such termination is initiated by Mr. Miller for any reason." (Document #69, exhibit 5, page 5). If Miller quit within 18 months of a change in control, he would be entitled to a lump sum payment equal to 36 months of his current salary, and to other payments and benefits that nearly equaled his severance salary.
The 1998 agreement also included the following paragraph within the severance provision:
4.7 Except as provided below, Employee's receipt and retention of any and all Severance Compensation is conditioned on Employee's not making unauthorized disclosure of confidential information relating to the Company for a period of three years after a Qualifying Termination, and not engaging directly or indirectly in competition with the Company, whether as an employee, sole proprietor, partner, independent contractor, director or otherwise, within the geographical area in which the Company has offices or other business locations for a period of three years after a Qualifying Termination. Membership by Employee on the board of directors of a publicly held corporation, if such membership has continued for at least six months as of the date of the Qualifying Termination, may be continued and such continuation shall not constitute competition (but Employee still must not disclose confidential information). Competition means providing services or information or material financing, without prior written approval of the Board of Directors of the Company, to any enterprise other than the Company if the enterprise is engaged in the same business as the Company and has sales or gross income of $250,000,000 or more in a year during which the competition occurs, or in any of the five prior years. . . . If the Board of Directors of the Company reasonably determines that Employee has dviolated this provision, it shall notify Employee in writing of the violation and employee shall have 60 days from the date of the notice to cure the violation. If the violation is not so cured by the end of the 60-day period, the Board of Directors may refuse to pay any as yet unpaid portion of Severance Compensation and Employee shall return to the Company all Severance Compensation Employee has received, thereby forfeiting all benefit from such Severance Compensation. . . .
Id. at pages 10-12.
Although the negotiations between Kroger and Fred Meyer had resulted in a merger agreement, Kroger needed shareholder approval to complete the merger. To that end, Kroger distributed a Joint Proxy Statement/Prospectus dated March 8, 1999. In it, Kroger stated that plaintiff would become its Chief Operating Officer and Vice Chairman of the Kroger board of directors, and that "[c]urrently Mr. Miller and Kroger are not negotiating a new employment agreement for the period after the merger." (Document 76, Declaration of Richard L. Baum, exhibit 2, page 6). The prospectus describes in detail the 1998 employment agreement between Fred Meyer and Miller, including the severance provisions cited above. The proxy statement also informed shareholders that "Mr. Miller may be entitled to severance payments under his employment agreement with Fred Meyer if his employment is terminated by Kroger or Mr. Miller following the merger." Id. at page 5.
The Kroger/Fred Meyer merger became effective on May 27, 1999, at which time Miller began his employment with Kroger. On September 16, 1999, Kroger and Miller entered into a new employment agreement, which was effective as of July 22, 1999 (the 1999 agreement). Miller's compensation in the 1999 agreement was materially unchanged from his 1998 agreement with Fred Meyer, although his authority within Kroger was significantly less than the authority he had previously exercised. The 1999 agreement also contained a separate sub-paragraph entitled "Non-Competition," which stated:
As CEO of Fred Meyer, Miller was the top person in that organization. Miller's position with Kroger, that of COO, made him the second in command under Joseph Pilcher, the CEO of Kroger.
Although the 1999 agreement was not signed until September 16, 1999, Miller had been acting COO and Vice Chairman of Kroger's Board of Directors since May 27, 1999.
(a) Except as provided below, Executive's receipt and retention of the Severance Compensation is conditioned on Executive's not making unauthorized disclosure of confidential information relating to the Company during the severance period and not engaging directly or indirectly in competition with the Company, whether as an Executive, sole proprietor, partner, independent contractor, director or otherwise, within the geographic area in which the Company has offices or other business locations during such period. Competition means providing services or information or material financing, without prior written approval of the Board, to any enterprise other than the Company if the enterprise is engaged in the same business as the Company and has sales or gross income of $250,000,000 or more in a year during which the competition occurs, or in any of the five prior years.
(Document #69, exhibit 12, page 6).
Miller resigned from Kroger on December 4, 1999. He began his employment as Chairman and CEO of Rite Aid on December 5, 1999. Kroger has refused to pay Miller any of his severance compensation because Rite Aid, in its view, is "in the same business as" Kroger.
Miller has filed two motions for partial summary judgment. In motion number one, he argues that the non-competition clause in the 1999 Kroger agreement is void as a matter of law. Miller also contends that, should his first motion fail, the court should find that Rite Aid is not "in the same business as" Kroger.
STANDARD OF REVIEW
A party is entitled to summary judgment as a matter of law if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact." Fed.R.Civ.P. 56(c); Bahn v. NME Hosp's, Inc., 929 F.2d 1404, 1409 (9th Cir.) cert. denied, 112 S.Ct. 617 (1991).
The moving party must carry the initial burden of proof. The party meets this burden by identifying portions of the record which demonstrate the absence of any genuine issue of material fact. Celotex Corp. V. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 2552 (1986). Once the initial burden is satisfied, the burden shifts to the opponent to demonstrate through the production of probative evidence that there remains an issue of fact to be tried. Id. The facts on which the opponent relies must be admissible at trial, although they need not be presented in admissible form for the purposes of opposing the summary judgment motion. Id.
The court must view the evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land Co., 669 F.2d 1278, 1284 (9th Cir. 1982). All reasonable doubt as to the existence of a genuine issue of fact should be resolved against the moving party. Hector v. Wiens, 533 F.2d 429, 432 (9th Cir. 1976). The inferences drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Valadingham v. Bojorquez, 866 F.2d 1135, 1137 (9th Cir. 1989). Where different ultimate inferences may be drawn, summary judgment is inappropriate. Sankovich v. Insurance Co. Of North America, 638 F.2d 136, 140 (9th Cir. 1981).
Deference to the non-moving party does have some limit. The non-moving party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e) (emphasis added). The "mere existence of a scintilla of evidence in support of the plaintiff's position would be insufficient." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 252 (1986). Therefore, where "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 587, 106 S.Ct. 1348, 1356 (1986).
DISCUSSION
1. Plaintiff's Motion for Summary Judgment (Number 1)
Plaintiff contends that, under Oregon law, the noncompetition clause in the 1999 Kroger employment agreement is void as a matter of law. Noncompetition agreements in Oregon are governed by ORS 653.295, which states in relevant part:
The 1999 agreement provides that the agreement "shall be construed in accordance with the laws of the State of Oregon."
(1) A noncompetition agreement entered into between an employer and employee is void and shall not be enforced by any court in this state unless the agreement is entered into upon the:
(a) Initial employment of the employee with the employer; or
(b) Subsequent bona fide advancement of the employee with the employer.
(2) Subsection (1) of this section applies only to noncompetition agreements made in the context of an employment relationship or contract and not otherwise. . . .
(4) Subsection (1) of this section does not apply to bonus restriction agreements, which are lawful agreements that may be enforced by the courts in this state. (5) Nothing in this section restricts the right of any person to protect trade secrets or other proprietary information by injunction or any other lawful means under any other applicable laws.
(6) As used in this section:
(a) "Bonus restriction agreement" means an agreement, written or oral, express or implied, between an employer and employee under which:
(A) Competition by the employee with the employer is limited or restrained after termination of employment, but the restraint is limited to a period of time, a geographic area and specified activities, all of which are reasonable in relation to the services described in subparagraph (B) of this paragraph;
(B) The services performed by the employee pursuant to the agreement include substantial involvement in management of the employer's business, personal contact with customers, knowledge of customer requirements related to the employer's business or knowledge of trade secrets or other proprietary information of the employer; and
(C) The penalty imposed on the employee for competition against the employer is limited to forfeiture of profit sharing or other bonus compensation that has not yet been paid to the employee. . . .
(c) "Noncompetition agreement" means an agreement, written or oral, express or implied, between an employer and employee under which the employee agrees that the employee, either alone or as an employee or another person, shall not compete with the employer in providing products, processes or services, that are similar to the employer's products, processes or services for a period of time or within a specified geographic area after termination of employment.
ORS 653.295.
Miller argues that the 1999 agreement with Kroger was not entered into either (1) upon "initial employment" or (2) upon a "subsequent bona fide advancement." He also argues that the noncompetition subparagraph in the 1999 agreement cannot be interpreted as a "bonus restriction agreement." Not surprisingly, Kroger argues the opposite on each point.
a. Initial Employment
Miller relies on the plain language of the statute. He points out that his employment with Kroger began almost four months before his employment agreement was signed, so that the noncompetition clause in the agreement was not, as a matter of law, entered into upon his initial employment with Kroger. Miller argues for the same result even allowing for the July 22, 1999, effective date for the agreement, because his initial employment preceded that date by nearly two months.
Kroger first argues that Miller is being "hypertechnical" in defining initial employment, and attempts to fashion an inference of contemporaneity out of its own attorney's questions during Miller's deposition, see Response to Miller's Concise Statement of Material Facts (#72); Declaration of Baum (#76), exhibit 1, pages 9-14), and by baldly stating that September 19, 1999, is "shortly after" May 27, 1999. See Kroger Memorandum in Opposition (#74), page 9("Miller argues that because he signed the 1999 Kroger Agreement shortly after he began work as Kroger's COO and Vice-Chair, the severance forfeiture provision was somehow not entered into upon his initial employment").
Kroger relies on Olsten Corporation v. Sommers, 534 F. Supp. 395 (D.Or. 1982), in which the court, after trial, found that an employee was bound by a noncompetition agreement that was signed approximately two weeks before her first day of work. In Olsten, the employee had orally accepted employment approximately one week prior to signing the agreement. In a discussion of what ORS 653.295 means by "initial employment," the court noted that an Oregon court had "held that a contract is deemed to be entered into upon initial employment when it is executed three days after the employee starts work." Olsten, 534 F. Supp. at 397-98; see Bousaka v. Wright, 49 Or. App. 763, 768 (1980) (enforcing agreement signed 3 days after employee began work, finding that "the evidence was sufficient for the jury to conclude that the promise not to compete and the initial employment were contemporaneous"). The court then found that "`initial employment' in ORS 653.295 means when the employee starts work." Olsten, 534 F. Supp. at 398. Neither Olsten nor Bousaka support defendant's position. Assuming an effective contract date of July 22, 1999, the seven-week interim in this case is simply too long to be analogous to the 3 days in Bousaka.
Kroger does not rely on Olsten for the fact that the noncompetition agreement was entered into prior to employment, or that the employee in Olsten had agreed to employment before she signed the noncompetition agreement, but only for the principle that "initial employment" meant "the time period when the employee started work — notably, not when the employee signed an employment contract —" (Defendant's Memorandum in Opposition, page 8).
Although the events giving rise to Bousaka pre-dated ORS 653.295, the parties do not dispute its applicability.
Plaintiff has submitted Ikon Office Solutions, Inc. v. American Office Products, 2001 U.S. Dist.LEXIS 9349 (D.Or. 2001), for the court's consideration. In Ikon, Judge Jelderks declined to extend Bousaka to enforce a noncompetition agreement which was signed seventeen days after the employee began work. "If 17 days after is timely, as Ikon contends, then why not 20 or 30 or even 60 days? I decline Ikon's invitation to embark on that path." Ikon, page 7.
Defendant also argues that the 1999 agreement, when viewed in the context of the number and complexity of the employment issues between the parties, was signed essentially at the same time that Miller was initially employed by Kroger. This argument also fails. The parties are clearly sophisticated enough to have initiated negotiations sufficiently prior to the expected merger so that an employment agreement would have been ready for execution when plaintiff began working for Kroger. Kroger's statements in the March, 1999, proxy statement 1) that it did not intend to negotiate a new agreement with Miller, and 2) that it could have obligations to Miller pursuant to the 1998 Fred Meyer agreement, clearly demonstrate that it was relying only on the 1998 agreement to govern Miller's
employment. A letter written by Kroger's counsel on July 2, 1999, confirms this. (Document #69, exhibit 6). Kroger has presented no evidence that it was attempting to negotiate a new employment agreement with Miller at the time Miller began working for Kroger.
Kroger also appears to argue that Miller and Kroger had orally agreed to the same employment contract terms, specifically including the noncompetition clause, that Miller had entered into with Fred Meyer prior to finalization of the merger.
When he officially began work for Kroger in May of 1999, Miller knew that there would be a severance forfeiture provision in his new employment agreement with Kroger that was substantially identical to the one in his 1998 Fred Meyer Agreement.
(Defendant's Memorandum in Opposition, page 10).
Defendant would have the court to consider the written and signed employment agreement as merely a memorialization of a timely oral agreement between the parties.
Miller has spent considerable time arguing that the noncompetition clause in the 1998 Fred Meyer agreement itself was void as a matter of law under Pacific Veterinary Hospital, P.C. v. White, 72 Or. App. 533 (1985), in which the court refused to enforce a noncompetition agreement that was modified to include more onerous restrictions than were contained in the original employment agreement. Although Miller is correct, the invalidity of the 1998 noncompetition agreement between Miller and Fred Meyer does not necessarily negate Kroger's argument. If Miller and Kroger orally agreed at the time of Miller's initial employment with Kroger that the terms of that (invalid) 1998 agreement were to be the terms of a separate employment agreement between Miller and Kroger, then there would have been a new noncompetition agreement. The date that a valid oral agreement was memorialized would arguably be irrelevant, and defendant could thereby escape the limitations of Bousaka and Olsten.
Unfortunately for Kroger, it did not present any credible evidence to support an inference of such an oral agreement. The evidence is all to the contrary, including Kroger's proxy statement of March, 1999, Kroger's attorney's letter of July 2, 1999, and the plain language of the 1999 agreement. Although the 1998 agreement was assignable, the otherwise void noncompetition provision within that agreement cannot gain legitimacy through assignment. See Welker v. TSPC, 152 Or. App. 190, 195 (1998) reversed on other grounds, 332 Or. 306 (2001); Commonwealth Electric Co. v. Fireman's Fund Ins., 93 Or. App. 435, 438 (1988).
Assuming, arguendo, that Kroger could point to some credible evidence that the parties initially relied on an oral noncompetition agreement independent from the 1998 agreement, defendant's argument is nonetheless fatally flawed. The record contains no evidence that the parties would have intended any changes whatsoever to the 1998 agreement. The terms of the 1999 agreement are more restrictive than the 1998 agreement because the geographical limitations are much greater, that is, the 1998 agreement limited competition to part of the western United States whereas the 1999 agreement limited competition to the entire United States. Therefore, the 1999 agreement would fail under Pacific Veterinary Hospital.
Under Oregon law, the 1999 agreement was not entered into upon Miller's initial employment with Kroger. First, Kroger cannot rely on the 1998 Fred Meyer agreement because the noncompetition clause in that agreement, to which Kroger was not a party, was void under Pacific Veterinary Hospital.
Second, Kroger cannot rely on its own written 1999 agreement because of the delay between Miller's employment and the signing of the agreement runs afoul of Bousaka and Olsten. Third, Kroger has presented no evidence of an independent oral agreement between it and Miller that was entered into when Miller began working for Kroger.
Finally, Kroger cannot (even assuming it could find evidence of an oral agreement) rely on any such oral agreement because the only possible terms of such an agreement are less restrictive than the 1999 Kroger written agreement. See Pacific Veterinary Hospital. Defendant has failed to present any evidence that could raise a genuine issue of material fact on any of its arguments.
(b) "Subsequent Bona Fide Advancement"
Defendant has also argued that if "the 1999 Kroger Agreement was not entered into upon Miller's initial employment with Kroger, then his new position with Kroger constituted a `subsequent bona fide advancement.'" (Defendant's Memorandum in Opposition, page 11). In support of this argument, Kroger summarily concludes that it is beyond question that Miller's new positions with Kroger were a bona fide advancement with new and larger responsibilities. The record is without evidence to support Kroger's conclusion.
Oregon law requires evidence of an actual promotion for a finding of a "subsequent bona fide advancement." Pacific Veterinary Hospital, 72 Or.App. at 538, n. 3. Therefore, in order to determine whether an employee received a promotion, the employee's initial and subsequent positions must be identified.
In Pacific Veterinary Hospital, a raise in pay was not sufficient to show a subsequent bona fide advancement.
Defendant asks the court to compare Miller's position as CEO of Fred Meyer with his position as COO of Kroger. Plaintiff argues that the relevant comparison is between Miller's position with Kroger before and after September 16, 1999. Miller points out that he was COO for Kroger from May 27th until September 16th, and that his position did not change after September 16th.
Using July 22, 1999, as the effective date of the employment agreement does not change the outcome here.
Although defendant once again characterizes plaintiff's argument as "hypertechnical," plaintiff is correct. Miller's "initial" employment period must be the four months from May until September, and the terms and conditions of Miller's employment with Kroger did not subsequently change.
Even if defendant was correct that the relevant comparison is between plaintiff's positions at Fred Meyer and Kroger, defendant cannot prevail. Kroger would have the court accept as fact, without any supporting evidence, that Miller did have new and larger responsibilities with Kroger in spite of the clear evidence that Miller received no additional compensation and that Miller exchanged his position as chief of a major corporation for that of a second in command.
Plaintiff has submitted Lazenby v. American General Corp., 1989 WL 106244 (Tenn.Ct.App. 1989) for the proposition that a change in position from President of a company before a merger, to Vice President of the merged company after the merger was an adverse change in employment status. Although Lazenby is not factually identical to this case, its reasoning is persuasive.
c. "Bonus Restriction Agreement" Exclusion
ORS 653.295 was amended in 1983, in part to address bonus restriction agreements and to overrule Bennett v. Les Schwab Tire Centers, 48 Or. App. 909 (1980). A "bonus restriction agreement" is defined in the statute as a "forfeiture of profit sharing or other bonus compensation that has not yet been paid to the employee." ORS 653.295(6)(a)(C). The employer can withhold the profit sharing or other bonus compensation if the employee competes with the employer after leaving employment and by so doing violates reasonable time and geographical restrictions placed on such competition. ORS 653.295(6)(a)(A). The statute does not offer additional guidance as to the meaning of "other bonus compensation that has not yet been paid to the employee."
In Bennett, the court invalidated a profit sharing agreement. See Pacific Veterinary Hospital, 72 Or.App. at 538, n. 3. The legislature subsequently amended ORS 653.295 to allow an employer to enforce bonus restriction agreements as they are defined in the statute.
Kroger argues that Miller's severance compensation is all unearned, future bonus compensation, and lists the following components of the severance package: (1) lump sum cash payment equivalent to three years' future salary; (2) lump sum payment equivalent to three years' future retirement benefits; (3) health and welfare coverage for three additional years; (4) lump sum cash payment of pro-rata salary bonus for the year in which termination occurs; and (5) excise tax gross-up cash payment for excise taxes to be paid as a result of the severance payment. Defendant highlights the words "future" and "additional", neither of which appear in the statute.
Miller responds that the severance compensation package in the 1999 agreement addresses bonuses as discrete and separate from the salary, retirement, health and tax benefits. He also points out that the penalty in the 1999 agreement exceeds the permissible reach of ORS 653.295(6)(a)(C) by including salary, health benefits and taxes, and argues that it must therefore be considered only as a noncompetition agreement under ORS 653.295(1).
Miller also argues that defendant, by filing suit for damages due to violation of his duty of confidentiality has forfeited the argument that his severance compensation is a bonus restriction agreement. He relies on ORS 653.295(6)(a)((C), which states: "The penalty imposed on the employee for competition against the employer is limited to forfeiture of profit sharing and other bonus compensation that has not yet been paid to the employee." However, ORS 653.295(5) specifically allows an aggrieved employer to seek other relief.
Plaintiff's arguments are persuasive. Plaintiff prevails for two additional reasons. First, the 1999 agreement contains the paragraph heading "Non-Competition." Second, the agreement states that "[Miller's] receipt and retention of the Severance Compensation is conditioned on [his] not making unauthorized disclosure . . . and not engaging directly or indirectly in competition with the company." The inclusion of the word "retention" places a duty on Miller to return the Severance Compensation if, after receipt, he violates the terms of the "Non-Competition" clause. This is contrary to the plain language of ORS 653.295(6)(a)(C).
According to defendant's reasoning, almost any non-competition penalty could be construed as a bonus restriction agreement.
2. Plaintiff's Motion for Summary Judgment (Number 2)
Plaintiff presents his second motion for partial summary judgment as an alternative to his first motion. Because the non-competition clause in the 1999 agreement is void as a matter of law under ORS 653.295, plaintiff's second motion is denied as moot.
CONCLUSION
Plaintiff's motion (#60) for partial summary judgment is granted. Plaintiff's motion (#65) for partial summary judgment is denied as moot.